How Price Controls Could Plug the New Product Pipeline

  • February 02, 2015
  • by Daniel Rehal

Regulated pharmaceutical prices are common in foreign countries, but the United States government has been reluctant to set pharmaceutical price ceilings. A recent online poll conducted by Pharmaceutical Executive asked its audience, which consists primarily of professionals working in the pharmaceutical industry, what their greatest concern is for the future of the industry. “Price controls” received 25% of the votes, second only to “A lack of new products in the pipeline” which garnered 33% of the vote.[1] One of the reasons that the United States has such an advanced pharmaceutical development infrastructure is that drug prices are considerably higher than abroad, but what would happen if the government initiated price controls?

Rising healthcare costs have been a focal point of debate throughout American politics in recent years, and most notably led to the Affordable Care Act of 2010. Although the law affected managed care practices, it did not directly pose any price controls on the pharmaceutical industry. Some were upset that the law did not create any drug price controls, citing rising copay costs and annual U.S. healthcare spending of $3.8 trillion.[2] However, many argue that price controls would be devastating to pharmaceutical research and development, and applaud the U.S. government’s decision not to impose price controls.

In 2013, Forbes estimated the price of developing a new drug at $5 billion.[3] Canadian policy, which is similar to that of many EU countries, sets drug price controls at just above the price of manufacturing the medication, but well below what is necessary to recoup R&D costs[4]. This forces American consumers to cover a disproportionate amount of research and development costs compared to consumers in other countries. In order to launch a successful pharmaceutical product based solely in countries with price controls, sales would often have to grow beyond the demand for the drug to offset the opportunity cost imposed by price controls.

The National Bureau of Economic Research conducted research that estimates that a law requiring a 40% to 50% decrease in drug prices would reduce the number of new pharmaceutical R & D projects in the United States by 30% to 60%.[5] The information points to the fact that the United States has a choice between lower medication costs today and better medications tomorrow, but so far politicians have generally been in favor of developing better medicines for tomorrow. There have been no recent bills in Congress discussing price controls, and at least in the short term, it is unlikely that there will be any changes to current pharmaceutical pricing laws. If this stands, ultimately the patients win.


[1] Greatest Concern for the Pharmaceutical Industry. (2014, September 1). Retrieved January 30, 2015, from http://www.pharmexec.com/pharmexec/survey/surveyList.jsp?viewResults=1&id=852003

[2] Munro, D. (2014, February 2). Annual U.S. Healthcare Spending Hits $3.8 Trillion. Retrieved January 30, 2015, from http://www.forbes.com/sites/danmunro/2014/02/02/annual-u-s-healthcare-spending-hits-3-8-trillion/

[3] Herper, M. (2013, August 11). The Cost Of Creating A New Drug Now $5 Billion, Pushing Big Pharma To Change. Retrieved January 30, 2015, from http://www.forbes.com/sites/matthewherper/2013/08/11/how-the-staggering-cost-of-inventing-new-drugs-is-shaping-the-future-of-medicine/

[4] Kerpen, P. (2012, May 22). The US Shouldn’t Import Prescription Drug Price Controls. Retrieved January 30, 2015, from http://dailycaller.com/2012/05/22/the-us-shouldnt-import-prescription-drug-price-controls/

[5] Francis, D. (2011, November 18). The Effect of Price Controls on Pharmaceutical Research. Retrieved January 30, 2015, from http://www.nber.org/digest/may05/w11114.html

 


About the Author

Daniel J. Rehal, President of Vision2Voice, thoroughly understands the pharmaceutical industry from the ground floor up. By ascending the ranks at Merck to his global responsibilities at Takeda, Dan has significant experience in both marketing and sales roles supporting a multitude of pharmaceutical brands as an award-winning Sales Representative, Training Manager, District Manager, Senior Product Manager, and Marketing Director.

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